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Spanish government between a rock and a hard place

by Ron Derby,
September 27 2012, 14:55

Ron Derby

Spanish government between a rock and a hard place

POLITICAL combined with market pressure is doing all the dirty work for countries in northern Europe that by and large agree that the only way to save the euro as a currency is for their southern neighbours to push on with reforms and in fact speed them up.

Over the past week, Spain has been in the headlines for all the wrong reasons. On the one hand you have the country’s citizens on the street boycotting any additional austerity measures. The protests have raised the prospect of a possible breakaway by Catalonia from the region’s fourth-biggest economy.

Catalonia, whose capital city is Barcelona, is the most powerful of Spain’s 17 autonomous regions.

That’s the political pressure faced by the 10-month-old Spanish government led by Mariano Rajoy.

Now the market pressure is for the exact opposite of what those protestors on the street want. Markets are calling for Spain to get rid of the uncertainty dogging the country by asking for European Central Bank (ECB) aid — aid that comes with the condition that the country accepts an economic reform programme drawn up by European Union authorities.

Earlier this month, the ECB president announced a bond-buying programme that would allow it to buy bonds of struggling nations such as Spain if debt costs become unsustainable. The caveat being that they would only intervene if a government asks for aid.

With 10-year Spanish bond yields above 6% and rising, pressure is growing on the Rajoy-led government. This aid comes with even more austerity, heightening political pressure in the country with unemployment closer to South Africa than the average for the region.

Bond yields of 7% and beyond are considered unsustainable. Greece and Ireland are just some of the countries that had to ask for help, when their yields moved above that mark.

To say the Spanish government is stuck between a rock and a hard place is an understatement of drastic proportions.

Minus the political pressure, this is exactly where the northern nations in Europe led by the “diligent” Germany want Spain and other countries like Italy in.

As Germany has the biggest cheque book in the region, any reform programme in the 17-member common monetary union is one endorsed by the country.

On Thursday, Mr Rajoy has to deliver a budget that pleases all sides. Near impossible, I think.

POLITICAL combined with market pressure is doing all the dirty work for countries in northern Europe that by and large agree that the only way to save the euro as a currency is for their southern neighbours to push on with reforms and in fact speed them up.

Over the past week, Spain has been in the headlines for all the wrong reasons. On the one hand you have the country’s citizens on the street boycotting any additional austerity measures. The protests have raised the prospect of a possible breakaway by Catalonia from the region’s fourth-biggest economy.

Catalonia, whose capital city is Barcelona, is the most powerful of Spain’s 17 autonomous regions.

That’s the political pressure faced by the 10-month-old Spanish government led by Mariano Rajoy.

Now the market pressure is for the exact opposite of what those protestors on the street want. Markets are calling for Spain to get rid of the uncertainty dogging the country by asking for European Central Bank (ECB) aid — aid that comes with the condition that the country accepts an economic reform programme drawn up by European Union authorities.

Earlier this month, the ECB president announced a bond-buying programme that would allow it to buy bonds of struggling nations such as Spain if debt costs become unsustainable. The caveat being that they would only intervene if a government asks for aid.

With 10-year Spanish bond yields above 6% and rising, pressure is growing on the Rajoy-led government. This aid comes with even more austerity, heightening political pressure in the country with unemployment closer to South Africa than the average for the region.

Bond yields of 7% and beyond are considered unsustainable. Greece and Ireland are just some of the countries that had to ask for help, when their yields moved above that mark.

To say the Spanish government is stuck between a rock and a hard place is an understatement of drastic proportions.

Minus the political pressure, this is exactly where the northern nations in Europe led by the “diligent” Germany want Spain and other countries like Italy in.

As Germany has the biggest cheque book in the region, any reform programme in the 17-member common monetary union is one endorsed by the country.

On Thursday, Mr Rajoy has to deliver a budget that pleases all sides. Near impossible, I think.

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